A business budget is a financial tool that not everyone uses, but something every business should. In order to use a business budget, one has to be created first. It is not enough, however, just to have a budget. It has to be useful and realistic. Here are a few tips and guidelines for creating a budget.
- Start with the easy items. There are certain expenses that are fairly predictable and static from month to month. For example, rent is an expense that is a predetermined, contractual expense. Usually, most selling and administrative expenses are fairly predictable and easy to plug into your budget. Once you get a total for administrative burden, you can realistically budget for your expenses.
- Know your margins. To build a realistic budget, you have to know your margins or target margin for products or employees. Use this to help determine your Cost of Sales and Revenue. If your budgeted margins do not reflect the actual or projected target margins of your business, the budget becomes useless. It no longer reflects your business.
- Make sure your revenue expectations are realistic. It may not be reasonable to assume constant growth. While we all strive to constantly improve and grow in a business, assess what is attainable for your business before setting your budgeted revenue goals.
- Remember, often with more sales comes a need for more employees, more materials, and more tools to fulfill orders. This also means additional administrative costs. While administrative costs do not have the same correlation to sales as direct costs, they will inevitably increase as your business grows. Be sure to include these additional costs in your budget.
- Structure your budget to be comparable to your financial reporting. Once your budget is complete, you will use it to compare to what actually happens. If you cannot easily compare the two, it creates more work than needed. When using a budget, you want to spend your time analyzing the variances, not trying to figure out how to compare it to your financial report.
Of course, there is a lot more that goes into creating an effective and useful budget, but if you have these basics, you are on your way to creating a useful tool to utilize in your business. See future blogs from TGG Accounting to get more tips on creating and using budgets or call us today to get started.Written by: Ashley Peth TGG Accounting